In a post up today on his blog, Paul Krugman notices that there “doesn’t seem to be much trickle-down going on” in the USA.

Unfortunately we can see the same pattern developing in Sweden. Look at the figure below, which shows how the distribution of mean income and wealth (expressed in year 2009 prices) for the top 0.1% and the bottom 90% has changed in Sweden for the last 30 years:

Source: The World Top Incomes Database

A society where we allow the inequality of incomes and wealth to increase without bounds, sooner or later implodes. The cement that keeps us together erodes and in the end we are only left with people dipped in the ice cold water of egoism and greed. It’s high time to put an end to this the worst Juggernaut of our times!

In this video science philosopher Nancy Cartwright explains why using Randomized Controlled Trials (RCTs) is not at all the “gold standard” that it has lately often been portrayed as. As yours truly has repeatedly argued on this blog (e.g. here and here), RCTs usually do not provide evidence that their results are exportable to other target systems. The almost religious belief with which its propagators portray it, cannot hide the fact that RCTs cannot be taken for granted to give generalizable results. That something works somewhere is no warranty for it to work for us or even that it works generally.

Unfortunately as we have all learned in the world of experience, little is known with certainty about future payoffs of investment decisions made today. If the return on economic decisions made today is never known with certainty, then how can financial managers make optimal decisions on where to put their firm’s money and householder’s where to put their saving today?

If theorists invent a world remote from reality and then lived in it consistently, then Keynes [1936, p.16] argued these economic thinkers were “like Euclidean geometers in a non-Euclidean world who discover that apparent parallel lines collide, rebuke these lines for not keeping straight. Yet, in truth there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics” …

As any statistician will tell you, in order to draw any statistical (probabilistic risk) inferences regarding the values of any population universe, one should draw and statistically analyze a sample from that universe. Drawing a sample from the future economic universe of financial markets, however, is impossible. Simply stated the ergodic axiom presumes that the future is already predetermined by an unchanging probability distribution and therefore a sample from the past is equivalent to drawing a sample from the future … Assuming ergodicity permits one to believe one can calculate an actuarial certainty about future events from past data.

Efficient market theorists must implicitly presume decision makers can reliably calculate the future. The economy, therefore, must be governed by an ergodic stochastic process, so that calculating a probability distribution from past statistical data samples is the same as calculating the risks from a sample drawn from the future. If financial markets are governed by the ergodic axiom, then we might ask why do mutual funds that advertise their wonderful past earnings record always note in the advertisement that past performance does not guarantee future results …

This ergodic axiom is an essential foundation for all the complex risk management computer models developed by the “quants” on Wall Street. It is also the foundation for econometricians who believe that their econometric models will correctly predict the future GDP, employment, inflation rate, etc. If, however, the economy is governed by a non-ergodic stochastic process, then econometric estimates generated from past market data are not reliable estimates that would be obtained if one could draw a sample from the future …

In sum, the ergodic axiom underlying the typical risk management and efficient market models represents, in a Keynes view, a model remote from an economic reality that is truly governed by non-ergodic conditions. Keynes, his Post Keynesian followers, and George Soros all reject the assumption that people can know the economic future since it is not predetermined. Instead they assert that people “know” they cannot know the future outcome of crucial economic decisions made today. The future is truly uncertain and not just probabilistic risky.

24 Mar, 2013 at 09:34 | Posted in Varia | Comments Off on Sunday morning and The Telegraph obits

One of yours truly’s Sunday morning rituals is reading the obituary column of The Telegraph. Today this obit caught my eyes:

Peter Scott, who has died aged 82, was a highly accomplished cat burglar, and as Britain’s most prolific plunderer of the great and good took particular pains to select his victims from the ranks of aristocrats, film stars and even royalty.

According to a list of 100 names he supplied to The Daily Telegraph, he targeted figures such as Soraya Khashoggi, Shirley MacLaine, the Shah of Iran, Judy Garland and even Queen Elizabeth the Queen Mother — although he added apologetically that, in her case, the authorities had covered up by issuing a “D-notice ”.

In 1994 Scott wrote to the newspaper to say that he would consider it “a massive disappointment if I were not to get a mention in [its] illustrious obituary column”. He explained that he derived much pleasure from reading accounts of the exploits of war heroes, adding: “I would like to think I would have fronted the Hun with the same enthusiasm as I did the fleshpots in Mayfair.” He added that he had been a Telegraph reader since 1957, when newspapers were first allowed in prisons, “on account of its broad coverage on crime”.

In the course of thieving jewellery and artworks from Mayfair mansions, Bond Street shops and stately homes, Scott also served Fleet Street as handy headline fodder, being variously hailed the “King of the Cat Burglars”, “Burglar to the Stars” or the “Human Fly”. He identified a Robin Hood streak in himself, too, asserting in his memoirs that he had been “sent by God to take back some of the wealth that the outrageously rich had taken from the rest of us”.

“I felt like a missionary seeing his flock for the first time,” he explained when he recalled casing Dropmore House, the country house of the press baron Viscount Kemsley, on a rainy night in 1956 and squinting through the window at the well-heeled guests sitting down to dinner. “I decided these people were my life’s work.”

Always a meticulous planner, Scott bought a new suit before each job, so that he would not look out of place in the premises he was burgling. Fear, the possibility of capture, excited him.

During one break-in “a titled lady appeared at the top of the stairs. ‘Everything’s all right, madam,’ I shouted up, and she went off to bed thinking I was the butler.” On other occasions, if disturbed by the occupier, he would shout reassuringly: “It’s only me!”

In all, by his own reckoning, Scott stole jewels, furs and artworks worth more than £30 million. He held none of his victims in great esteem (“upper-class prats chattering in monosyllables”). The roll-call of “marks” from whom he claimed to have stolen valuables included Zsa Zsa Gabor, Lauren Bacall, Elizabeth Taylor, Vivien Leigh, Sophia Loren, Maria Callas and the gambling club and zoo owner John Aspinall. “Robbing that bastard Aspinall was one of my favourites,” he recollected. “Sophia Loren got what she deserved too.”

Scott stole a £200,000 necklace from the Italian star when she was in Britain filming The Millionairess in 1960. Billed in the newspapers as Britain’s biggest jewellery theft, it yielded Scott £30,000 from a “fence”. After Miss Loren had pointed at him on television saying: “I come from a long line of gipsies. You will have no luck,” Scott lost every penny in the Palm Beach Casino at Cannes.

In the 1950s and 1960s he pinpointed his targets by perusing the society columns in the Daily Mail and Daily Express. Nor did he ease up with the approach of middle-age; in the 1980s he was still scaling walls and drainpipes. In one Bond Street caper alone he stole jewellery worth £1.5 million, and in 1985 he was jailed for four years. On his release he expanded his social horizons by becoming a celebrity “tennis bum”, a racquet for hire at a smart London club where — as he put it in his autobiography — he coached still more potential “rich prats”.

By the mid-1990s, Scott had served 12 years in prison in the course of half a dozen separate stretches, and claimed to have laid down his “cane” [jemmy] and retired from a life of crime.

But in 1998 he was jailed for another three and a half years for handling, following the theft of Picasso’s Tête de Femme from the Lefevre Gallery in Mayfair the year before. To the impassive detectives who arrested him, Scott quoted a line from WE Henley: “Under the bludgeonings of chance, my head is bloody but unbowed.” He often drew on literary allusions, quoting Confucius, Oscar Wilde and Proust.

Scott was also a past-master in self-justification of his crimes and misdemeanours: “The people I burgled got rich by greed and skulduggery. They indulged in the mechanics of ostentation — they deserved me and I deserved them. If I rob Ivana Trump, it is just a meeting of two different kinds of degeneracy on a dark rooftop.”

In his memoirs, Gentleman Thief (1995), Scott admitted to an even stronger motivation than fear as he contemplated another “job”: “Even now, after 30 years, it was a sexual thrill.” There was the additional satisfaction in his assumption that the millions reading about his exploits in the papers were silently cheering him on.

In his review in 1938 of Historical Development of the Graphical Representation of Statistical Data, by H. Gray Funkhauser, for The Economic Journal, the great economist writes:

“Perhaps the most striking outcome of Mr. Funkhouser’s researches is the fact of the very slow progress which graphical methods made until quite recently … In the first fifty volumes of the Statistical Journal, 1837-87, only fourteen graphs are printed altogether. It is surprising to be told that Laplace never drew a graph of the normal law of error … Edgeworth made no use of statistical charts as distinct from mathematical diagrams.

Apart from Quetelet and Jevons, the most important influences were probably those of Galton and of Mulhall’s Dictionary, first published in 1884. Galton was indeed following his father and grandfather in this field, but his pioneer work was mainly restricted to meteorological maps, and he did not contribute to the development of the graphical representation of economic statistics.”

So far so good. But then comes the kicker:

“Mr. Funkhouser has made an extremely interesting and valuable contribution to the history of statistical method. I wish, however, that he could have added a warning, supported by horrid examples, of the evils of the graphical method unsupported by tables of figures. Both for accurate understanding, and particularly to facilitate the use of the same material by other people, it is essential that graphs should not be published by themselves, but only when supported by the tables which lead up to them. It would be an exceedingly good rule to forbid in any scientific periodical the publication of graphs unsupported by tables.”

I’m ok with that—if they also forbid the publication of all tables unsupported by graphs. Also if they allow graphs by themselves. Then I’m totally on board.

Well, actually, I think Keynes was more right than wrong, considering how difficult it was back in the 1930s to get hold of other people’s data. Including tables made the data available to other researchers and thereby made it easier to evaluate the validity of the statistical analysis.

The Riksbank in 1993 announced an official target for CPI inflation of 2 percent. Over the last 15 years, average CPI inflation has equaled 1.4 percent and has thus fallen short of the target by 0.6 percentage points. Has this undershooting of the inflation target had any costs in terms of higher average unemployment? This depends on whether the long-run Phillips curve in Sweden is vertical or not. During the last 15 years, inflation expectations in Sweden have become anchored to the inflation target in the sense that average inflation expectations have been close to the target. The inflation target has thus become credible. If inflation expectations are anchored to the target also when average inflation deviates from the target, the long-run Phillips curve is no longer vertical but downward-sloping. Then average inflation below the credible target means that average unemployment is higher than the rationalexpectations steady-state (RESS) unemployment rate. The data indicate that the average unemployment rate has been 0.8 percentage points higher than the RESS rate over the last 15 years. This is a large unemployment cost of undershooting the inflation target. Some simple robustness tests indicate that the estimate of the unemployment cost is rather robust, but the estimate is preliminary and further scrutiny is needed to assess its robustness.
…
During 1997-2011, average CPI inflation has fallen short of the inflation target of 2 percent by 0.6 percentage points. But average inflation expectations according to the TNS Sifo Prospera survey have been close to the target. Thus, average inflation expectations have been anchored to the target and the target has become credible. If average inflation expectations are anchored to the target when average inflation differ from the target, the long-run Phillips curve is not vertical. Then lower average inflation means higher average unemployment. The data indicate that average inflation below target has been associated with average unemployment being 0.8 percentage points higher over the last 15 years than would have been the case if average inflation had been equal to the target. This is a large unemployment cost of average inflation below a credible target. Some simple robustness tests indicate that the estimate of the unemployment cost is rather robust, but the estimate is preliminary and further scrutiny is needed to assess its robustness.

The difference between average inflation and average inflation expectations and the apparent existence of a downward-sloping long-run Phillips curve raises several urgent questions that I believe need to be addressed. Why have average inflation expectations exceeded average inflation for 15 years? Why has average inflation fallen below the target for 15 years? Could average inflation have fallen below average inflation expectations and the inflation target without the large unemployment cost estimated here? Could the large unemployment cost have been avoided with a different monetary policy? What are the policy implications for the future? Do these findings make price-level targeting or the targeting of average inflation over a longer period relatively more attractive, since they would better ensure that average inflation over longer periods equals the target?

According to Lars E. O. Svensson – deputy governor of the Riksbank – the Swedish Riksbank has been pursuing a policy during the years 1998-2011 that in reality has made inflation on average 0.6 percentage units lower than the goal set by the Riksbank. The Phillips Curve he estimates shows that unemployment as a result of this overly “austere” inflation level has been almost 1% higher than if one had stuck to the set inflation goal of 2%.

What Svensson is saying, without so many words, is that the Swedish Fed for no reason at all has made people unemployed. As a consequence of a faulty monetary policy the unemployment is considerably higher than it would have been if the Swedish Fed had done its job adequately.

From a more methodological point of view it is of course also interesting to consider the use made of the rational expectations hypothesis in these model-based calculations (and models of the same ilk that abounds in “modern” macroeconomics). When data tells us that “average inflation expectations exceeded average inflation for 15 years” – wouldn’t it be high time to put the REH where it belongs – in the dustbin of history!

To me Svensson’s paper basically confirms what I wrote a couple of months ago:

Models based on REH impute beliefs to the agents that is not based on any real informational considerations, but simply stipulated to make the models mathematically-statistically tractable.

Of course you can make assumptions based on tractability, but then you do also have to take into account the necessary trade-off in terms of the ability to make relevant and valid statements on the intended target system.

Mathematical tractability cannot be the ultimate arbiter in science when it comes to modeling real world target systems. Of course, one could perhaps accept REH if it had produced lots of verified predictions and good explanations. But it has done nothing of the kind. Therefore the burden of proof is on those who still want to use models built on ridiculously unreal assumptions – models devoid of all empirical interest.

In reality, REH is a rather harmful modeling assumption, since it contributes to perpetuating the ongoing transformation of economics into a kind of science-fiction-economics. If economics is to guide us, help us make forecasts, explain or better understand real world phenomena, it is in fact next to worthless.

When it comes to questions of causality, randomized controlled trials (RCTs) are nowadays considered some kind of “gold standard” in social sciences and policies. Everything has to be “evidence based,” and the evidence preferably has to come from randomized experiments.

But randomization is basically – just as e. g. econometrics – a deductive method. Given warranted assumptions (manipulability, transitivity, separability, additivity, linearity etc) this method delivers deductive inferences. The problem, of course, is that we will never completely know when the assumptions are warranted and a fortiori being able to justify our causal conclusions. Although randomization may contribute to controlling for “confounding,” it does not guarantee it, since genuine ramdomness presupposes infinite experimentation and we know all real experimentation is finite. Even if randomization may help to establish average causal effects, it says nothing of individual effects unless homogeneity is added to the list of assumptions. Real target systems are seldom epistemically isomorphic to our axiomatic-deductive models/systems, and even if they were, we still have to argue for the external validity of the conclusions reached from within these epistemically convenient models/systems. Causal evidence generated by randomization procedures may be valid in “closed” models, but what we usually are interested in, is causal evidence in the real target system we happen to live in.

So RCTs are not at all the “gold standard” they have lately often been portrayed as. RCTs usually do not provide evidence that their results are exportable to other target systems. RCTs cannot be taken for granted to give generalizable results. That something works somewhere is no warranty for it to work for us or even that it works generally.

Even though I can present evidence for being able to sharpen my pencils with Rube Goldberg’s ingenious construction – mainly becuase flying kites in my windy hometown (Lund, Sweden) is no match – it does not come with a warranted export license. Most people would probably find ordinary pencil sharpeners more efficacious.

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